Sam Hardwick's web journal

A tremendous portion of the world’s wealth has been accumulated for the purpose of providing for the retirement of the west’s aging baby boomers. It’s impossible to find overall numbers, but it’s definitely in the range of tens of percent of global equities and bonds (and much more than that in real estate, which the retirees themselves own outright in vast numbers). Incidentally, Norway’s centralized pension fund is the biggest, at 443 billion dollars. It alone owns about 1% of global equities and 1.8% of European equities.

I got to thinking: what’s going to happen with all this wealth? You can’t eat stocks, or be medically cared for by them, so there will have to be a sell-off. You might think that this will be compensated for by young people coming into the system, saving money for their retirement, but it’s becoming obvious in most western countries that the pension schemes aren’t going to last long enough for them to get anything out again. Meaning that practically all of this retirement wealth is going to get zeroed out in some number of decades.

Every time something is sold, it has to be bought by someone else. So who will be the counterparty? How are the retirees going to safely exit their positions? My first thought was that the money just won’t be there, and a long-lasting down market will result. Many will feel the temptation to sell their houses either with reverse mortgages or just to move to somewhere cheap and warm, at which point the housing market will come under pressure too.

But then it struck me that there are constant news stories about loose money with no home – in China! Is that what’s going to happen, that money produced in the so-called developing markets will move into the west during that lengthy down market? Incidentally, that effect will be leveraged by the sheer demographic facts – everything the pensioners consume has to be produced relatively close to the time of consumption, and the productive capacity for some of that consumption won’t be present in the west, so prices for consumables and commodities would go up.

If this happens, there really will be some interesting times politically. Protectionism and militarism will come to the fore. Much of the pensions aren’t even backed by assets but by promises, which are backed only by governments’ abilities to tax. It will be difficult to extract much money out of working people, since they will be tempted to move out to the rising east, so presumably business taxes and tariffs on imports will be the solution. There will be a lot of tension between western governments trying to hold on to sovereignity & a high standard of living while productive assets drift out and the nations gaining those assets. And defending the unmotivated, aging overdog against the super-motivated underdog gets really expensive. Just look at the Roman Empire.

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